Uncategorized
Non-QM RMBS grows and stretches
admin | April 4, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Rapid growth in issuance of non-QM RMBS has started to stretch the boundaries of the sector. Issuance has quadrupled so far this year from the same time last year, but growth has come with an increasing population of high LTV loans, higher borrower debt-to-income ratios and more loans with limited or alternative documentation. Borrower credit scores remain strong, and increased tail risk shows up in some but not all major non-QM issuers. Fortunately, spreads in the sector have widened, adding some cushion for the added loan risk.
Rising loan-to-value
Rising LTV ratios are not unique to the non-QM market. Robust home price appreciation over recent years has driven average LTV ratios higher across agency MBS and CRT as well as private-label prime jumbo deals. Simply looking at average original LTVs in non-QM trusts, however, does not show any material rise (Exhibit 1).
Exhibit 1: Average original LTV across non-QM trusts

Source: Amherst Insight Labs, Amherst Pierpont Securities
The distribution of loans by LTV and vintage tells a different story, however. Populations of 80-90 LTV loans have risen from 18% of all collateral backing non-QM trusts in 2016 to 27% of total collateral in 2018. Most of the rise in higher LTV loans has been at the expense of 60-70 loans, which have fallen from 23% of total collateral in 2016 to just 19% of all loans last year. While the amount of high LTVs loans continues to grow, it does not appear to be at any expense to the quality of those loans as FICO scores have been consistently in the low 700s across vintages.
Exhibit 2: Non-QM issuance by vintage and original LTV

Source: Amherst Insight Labs, Amherst Pierpont Securities
Looking across the four largest non-QM issuers, the most pronounced increase in 80-90 LTV loans come from the Angel Oak, Caliber and Deephaven shelves with a much smaller bump in Invictus’ VERUS shelf (Exhibit 3). While Caliber’s COLT shelf has seen the largest increase in high LTV loans, COLT has also seen the most pronounced increase in credit scores on those loans, rising from an average of 702 in 2016 to 715 last year.
Exhibit 3: Original LTV distribution by issuer and vintage

Source: Amherst Insight Labs, Amherst Pierpont Securities
Higher debt-to-income
Higher DTI loans have also become a larger part of non-QM loan collateral. Loans with debt-to-income ratios greater than 40 made up 31% of all loans in non-QM trusts in 2016 and 44% of all loans last year (Exhibit 4). A few details:
- Loans between 45 to 50 DTI made up an additional 8% of 2018 collateral, but average FICO scores jumped by 13 points from 696 to 709.
- Loans between 50 to 55 DTI rose by 4% but FICO scores remained flat, potentially raising concerns about layered risk in high DTI loans.
Exhibit 4: Non-QM issuance by vintage and DTI

Source: Amherst Insight Labs, Amherst Pierpont Securities
Caliber’s COLT shelf saw the largest percentage increase in 40 to 45 DTI loans, increasing from 8% of 2016 collateral to 27% of loans securitized in 2018. While the shelf had the most dramatic increase in those loans, they had an average FICO score markedly higher than those with comparable DTIs in other programs. Looking at that DTI bucket across the four major issuers in 2018 Caliber’s loans had an average FICO of 721, markedly higher than those of Angel Oak, Deephaven or Verus who’s comparable loans had average FICO scores of 703, 696 and 704 respectively. (Exhibit 5)
Exhibit 5: Debt-to-income ratio distribution by issuer and vintage

Source: Amherst Insight Labs, Amherst Pierpont Securities
More limited or alternative documentation
Over the past two years the population of full documentation loans has been giving way to limited documentation or loans underwritten using other methods like asset depletion or debt service coverage to qualify. The population of full doc loans in non-QM trusts tends to be volatile making up as much as two thirds of early issuance and less than a quarter of loans securitized in 2017.
Unfortunately, underwriting and documentation across shelves with the most alternative documentation are not uniform and as such it makes it somewhat challenging to make truly equivalent comparison of risks in limited or alternative documentation loans. Simply looking at 2018 issuance would suggest that limited and alternative documentation loans in Invictus’ VERUS program may be the least risky given an average 720 FICO and 67 original CLTV. Slightly better than Deephaven’s limited documentation loans that had an average 712 FICO and 72 origial CLTV. Non-full doc loans in the COLT and Angel Oak programs had average FICOs of 709 and 705 and original CLTVs of 78 and 79 respectively.
Compensation for risk
This leads to the question of whether the changing risk profiles of these pools are being priced accordingly. We do not expect the changing collateral profiles of these deals to impact the AAA classes of these deals from a loss perspective, any material deterioration in collateral performance would impact the AAA classes from a mark to market perspective. Looking at the historical spread relationship between non-QM AAA bonds and current coupon 15-year pass- throughs, a comparable duration agency asset, shows that currently non-QM AAA spreads are roughly 25 bps wider than they were to that agency benchmark this time last year suggesting that the market has commanded a meaningful incremental risk premium for the changing credit profile of the asset class on a relative basis. (Exhibit 6)
Exhibit 6: Average spread between non-QM AAA and current coupon 15-year

Source: Amherst Insight Labs, Amherst Pierpont Securities
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2025 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.